Modern
financial theory is the basis of behavioral psychology. In the early 1950 s,
modern finance theory was formally put forward, it argues that the current
stock market has a variety of risks, these risks can be divided into two
categories, namely systematic and unsystematic. Diversification of investment
will not lead to the disappearance of systemic risks, while non-systemic risks
can disappear, which will result in the difference between risks, which can be
dispersed and cannot be dispersed. Because risk distinction, investors have
more choice, can choose a higher risk for more, also can be at lower risk of
small to reduce their own profits, the benefits and risks of financial products
as a whole has become the most concern of the investors.

Some
western economists from the Angle of psychology, analyzes the behavior of
investors, they found that most investors itself is not reason, because
investors have too high expectations, so they don't know how to avoid risk.
Many investors will appear after the earnings does not meet the psychological,
did not realize the importance risk, expect it to increase, once appear losses,
investors would recognize the risk, to learn to avoid risk. This theory can be
thought of as the beginning of behavioral finance, because it incorporates
elements of psychology. Behavior finance completely solidifies in the 1980 s,
the researchers found the correspondency of finance and psychology, can explain
many investors through psychology, the financial market for better development.

The
relationship between investor behavior and psychological existence is the main
research content of behavioral finance, which divides investor psychology into
two parts, namely, value feeling and rational pursuit of profit. Value refers
to the feeling is in the capital market, investors show a state of mind and
emotions, some investors are susceptible to the infection of others, the
behavior and emotions of others will affect their own investment behavior; Some
investors bet against be swayed by considerations of gain and loss. Some
investors love risk because they believe it pays. Rational who refers to
understand all kinds of financial theory, portfolio theory, arbitrage pricing
theory, for example, in theory as the foundation, to buy financial products,
keep its able to invest through to get the corresponding benefit. Value is the
main content of behavioral psychology, which involves investors' psychological
activity and behavior change, but some scholars believe that behavioral finance
simply will be fusion, finance and psychology itself cannot become an
independent discipline, therefore, behavioral finance has always been
controversial.

In
general, investors have the following mentality in the investment process.
First, conformity. Many investors are easy to be influenced by others, have the
herd mentality when making investment, and are easy to adjust their decisions
according to the behavior of others. Second, overconfidence. Many investors do
not know themselves and the actual situation of the market. They tend to
overestimate themselves and trust their own judgment too much. Third, too much
emphasis on risk aversion. Every investor wants to gain more benefits through
investment activity, but too many investors fear risk, when they invest in, the
first to think of not make a profit but avoid risk, this will affect their
investment behavior. Behavior finance can be from the perspective of
psychology, analyze the mentality of investors, by means of psychology, the
correcting wrong ideas and behavior of each investor, investors and investment
market toward standardization direction.

Financial
markets there are many investors, rational investors share is very small, most
investors are irrational investors, irrational investors are influenced by
their own information, attitude, mood is more serious. Every investor has
certain differences, some investors have information sources, some investors
lack information sources. Moreover, there is also a preference in the choice of
information. Different understandings of the same information may occur, which
will have many effects on investors. Financial markets dominated by rational
investors, this is the ideal state, but the implementation of high difficulty,
the conditions of the current difficult to meet, such as the irrational
investors number less than rational investors, rational investors can grasp the
financial market information, ensure that every investor in financial market.
Irrational investors cannot disappear from financial markets and can only be
controlled. Behavioral finance can form a corresponding elimination mechanism,
control the number of irrational investors, reduce the emergence of irrational
behaviors, so that every investor can develop in a rational direction.

The
financial behavior itself has certain complexity, the rational investor and the
irrational investor exist together, many theories and researches revolve around
these behaviors. Behavioral finance argues that financial market is not fully
possible reason, it let finance have more broad research content, have
contributed to the behavioral finance and finance with the possibility of the
fusion, let the behavioral finance has better prospects for development.

First
of all, finance and behavioral finance share the same research object. They are
included in the study content related to investors, finance study Angle towards
rational and irrational investors, and behavioral finance study Angle to the
normal view of investors. Their research concepts have certain commonality, and
their research methods are similar to each other.

Second,
there are differences between finance and behavioral finance, but they can be
reconciled. Investors' rationality is the key to the divergence between finance
and behavioral finance. In the view of behavioral finance, investors need to
rely on information. Right? Q, and the different information sources, there
exist deviations in understanding will let investors when the deviation caused
by investment mistakes, and mistakes repeatedly occurs, investors will reflect
on their actions, when investors have good sources of information, cognitive
deviation will disappear, if correctly guide investors in financial markets,
investors can also gradually to the rational development. Therefore, behavioral
finance believes that investors can be rational, which is the same as finance.

Third,
finance has the same theory as behavioral finance. Finance and behavioral
finance are considered to have common features in many theories. For example,
the asset theory of finance is generally regarded as a part of behavioral
finance portfolio theory. Both the pricing theory of finance and the pricing
theory of behavioral finance come from the thought of supply and demand.

These
suggested that there are big contact finance and behavioral finance, with the
development of the modern financial industry, the finance also constantly add
new content, this also is the development of behavioral finance has
opportunity, behavioral finance can rely on the development of finance, let
oneself have better prospects for development, in the new era to ensure their
own thoughts, the validity of the theory.